How Much of Your Debt Should Be Taken Up by Your Mortgage?

Buying a house is a milestone for anyone.
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Buying a house entails dozens of decisions, from how big the house should be to what neighborhood you prefer. But the biggest decision of all is determining how much house you can afford. You’ll need to fit your mortgage payments in with your other monthly expenses, such as a car payment, utility bills, insurance and other budget items. It’s easy to over-estimate or under-estimate how large a house payment you can afford. Banks and mortgage companies look at the size of your mortgage compared to your income and your other debt in order to determine whether or not you qualify for a loan.

Housing Expense Ratio

One figure to consider is the size of your potential house payment compared to your income. Banks sometimes refer to this as the front-end ratio. Most banks don’t want to see a front-end ratio of more than 28 percent. In other words, your total monthly mortgage expense, including taxes and insurance, shouldn’t be more than 28 percent of your monthly gross income.

Back-End Ratio

The back-end ratio looks at your total debt, including your mortgage, compared to your monthly income. With this formula, someone who didn’t have a lot of other debt, such as no car payment and no credit-card debt, could afford to take on more mortgage debt compared to someone who was already juggling a lot of other monthly payments. Your total monthly debt shouldn’t be more than 36 percent of your monthly gross income. To figure this, add up all your monthly debt, including student loan payments, car payments, credit card payments and monthly mortgage costs. Don’t include items such as utilities and groceries.

FHA Requirements

The Federal Housing Authority, or FHA, allows a slightly larger debt-to-income ratio for its loans. To qualify for an FHA loan, your monthly housing expenses can’t be more than 31 percent of your monthly income, and your total monthly debt can’t be more than 43 percent of your monthly income.

Other Considerations

Mortgage lenders consider debt ratios when determining your credit-worthiness, but they’ll also look at your credit history, employment history and other factors. You may be able to qualify for a loan even if you exceed the established debt ratios. For instance, if you have substantial savings or large investment income, this might offset your larger debt. The key will be finding a loan officer who will work with you. But you should also consider whether exceeding established debt ratios is a good idea for you. If your house payment eats up a large share of your monthly income, you may find it more difficult to recover from a setback such as an unexpected large expense or a month in which your income was lower than usual.

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